Forex Trading from Zero to Ace » traders http://cobblog.com Forex trading for beginners and experienced traders, thoughts, analisys, articles and forecasts. Sun, 21 Mar 2010 11:43:56 +0000 http://wordpress.org/?v=2.9.1 en hourly 1 Everything you need to know about Pips and Spreads http://cobblog.com/everything-you-need-to-know-about-pips-and-spreads/ http://cobblog.com/everything-you-need-to-know-about-pips-and-spreads/#comments Sun, 21 Feb 2010 09:35:16 +0000 admin http://cobblog.com/?p=43 Forex trading is exciting, it’s challenging and it has the potential to earn you large sums of revenue.  Now, if you are fairly new to Forex trading, it will not be long before you began to hear the terms ‘Pips’ and ‘Spreads’ thrown around in Forex circles.  For example, when looking for a Forex broker, you will be advised to find a broker with a low spread.   You might also learn that a currency has risen or fallen by a certain number of pips.  These two words are basically used to make it easier to accurately calculate and indicate how much a currency is worth.  Pips and spreads are of importance to both traders and brokers, so it is a good idea to get to grips with what they are as early on as possible in your trading career.
You have probably heard that Forex currency rates fluctuate on a constant basis.  Day and night currencies go up and down, quite quickly sometimes.  This is all part of Forex and it is the characteristic that makes trading Forex a 24 hour a day, 7 day a week endeavor… potentially anyway.  Very often the changes that are seen in currencies are small and subtle.  In fact, rate changes are often so small that they are measured in units that are even smaller than the number one.  Currencies are measured using decimals.  Notice how you usually see currency rates written with a decimal point and then two to four numbers after the decimal point.
Currency rate changes are often so small that they are measured in Pips.  A Pip is an extremely small unit of measurement.  1 Pip basically pans out to be the equivalent of 0.0001.  The smallest possible rate change that can be seen or measured in currencies is the Pip.   Here is an example of pips in a standard currency pair:  USD/EUR is 1.232/1.239.  This figures used in this example have what is known in Forex as a 7-pip spread – they have a spread of 7 pips; the difference between the two figures.
What is a Spread?
The spread is the difference in value between the buy and the sell rate of a currency.  The buy price is at times also called the ‘bid’ and the sell price is also known as the ‘ask’.  The spread is an amount that is set by the market maker.  When you understand Forex at a deeper level, you will learn that it is the market maker that takes the biggest risk in a Forex trade. They make the trade possible and they place that they make their profit is in the spread.   The larger the spread, the more money they make.
There is always a spread or a difference between the buy and sell rates.  New Forex traders often fail to realize that if you purchase a currency and hold it for as little as 5 minutes, and even if it there is no change in the currency rate, that you will still lose money if you sell it.  This is because currencies are never bought and sold at the same price.  Currencies always sell at a lower rate than they are purchased at.
]]> http://cobblog.com/everything-you-need-to-know-about-pips-and-spreads/feed/ 1 The Rise and Fall of Currencies http://cobblog.com/the-rise-and-fall-of-currencies/ http://cobblog.com/the-rise-and-fall-of-currencies/#comments Sun, 07 Feb 2010 23:33:07 +0000 admin http://cobblog.com/?p=30 Forex trading is an exciting way to invest. Traders earn money through buying and selling currency. The aim to sell for more than you bought it for. This simple principle is seen throughout the world of business and investing.

Why Do Currencies Fluctuate?
The Foreign Exchange (Forex) is in operation 24 hours a day, 7 days a week. People are trading in Forex all of the time. The Foreign Exchange is the largest trading market in the world. Trillions of dollars in currency are literally traded every single day on the Foreign Exchange. Each day, as currencies are traded; bought and sold, you will see the rates of currencies continually rising and falling. Currencies from around the world are in a constant state of fluctuation.

How Do Currencies Fluctuate?
Although if you were to go back in the history of currencies, you would find that previously the value of a currency was based on the amount of gold that the country held. The USA and other developed countries made a decision to change this system and to base the value of currency on the gross domestic product of each individual country. This is the system that we still find in use today.

When it comes down to the complex task of deciding the rate for each currencies, demand for that currency is the major deciding factor. Currencies are subject to two types of demand, Transactional Demand and Speculative Demand. Transactional Demand is calculated by the country’s economic growth, the employment rate in the country as well as how quickly money moves through that country’s economy. Speculative Demand is calculated by forecasts related to whether the currency is expected keep the value that It is at. This is assessed by projected, future economic activity, any inflation that might be anticipated and more.

The Foreign Exchange market trades continually and operates non-stop. It is a worldwide market and therefore an hour that might be nighttime in your home country could be the middle of the day somewhere else. Activity is happening all of the time in the world of Forex and rates are rising and falling continually.

Currencies Affect One Another
Currencies all relate to one another at the end of the day. They are compared against one another and they are bought and sold against one another, in what is known as currency pairs, and they are constantly measured against one another. Currency rates are affected by a whole host of factors.

One significant factor that has not yet been mentioned yet that has a large impact on currency rates is interest rates. Every country has their version of a central bank. It is the central bank in each country that sets the interest rates for lending and borrowing. These interest rates also affect the rate at which their currency sells for. It is measured against other currencies using rather complex formulas. Determining currency rates is not an exact science because speculation is involved. Therefore there is risk involved in this process. Carry traders, which can almost be described as middle men, bear the brunt of this risk. There is a chance that they will lose money because of this. At the same time, there is a chance that they will speculate correctly and earn extremely large sums of money because of it.

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